LONDON (Reuters) - Sterling retreated from a recent eight-month high against the dollar on Tuesday after data showed British consumer inflation slowed in August, giving the Bank more leeway to keep policy accommodative.
In monthly terms, the consumer price index (CPI) rose 0.4 percent, slightly slower than a forecast of 0.5 percent and the lowest monthly increase for August since 2009. For the year, consumer price inflation was at 2.7 percent versus 2.8 percent in July, in line with forecasts.
Sterling fell to $1.5893 after the CPI data from $1.5927 beforehand. Traders said subdued producer price data also weighed on the currency.
It also fell against the euro. The euro rose to a session high of 84.10 pence from 83.85 before the inflation data was released. The shared currency was also helped by better-than-expected economic sentiment survey from Germany's ZEW Institute.
"Sterling has fallen after the inflation data and it looks unlikely that $1.60 will be hit, given we have the FOMC decision in the near term," said Alex Edwards, head of corporate sales at UKForex.
Investors were reluctant to make fresh bets before the Federal Open Market Committee (FOMC) meeting, which begins later on Tuesday. A Reuters poll has shown economists expect the Fed to reduce monthly asset purchases by a relatively modest $10 billion.
Edwards expects the Fed to reduce monthly asset purchases by $15 billion and says that could give the dollar a lift and sterling could edge down to $1.58.
RELIEF TO THE BOE
The August inflation data would come as a relief to the Bank given that investors are increasingly pricing in the chance of monetary tightening well before it has forecast in its forward guidance plan last month.
"Receding inflation, even at quite a slow pace, gives the BOE some breathing space and could keep the market off its back, at least for the short term," said Kathleen Brooks, research director at FOREX.com.
Indeed, sterling overnight interbank average rates (SONIA) were pricing in a chance of the first move by the BoE in 18 months compared with 15 months just a week ago.
The 15-month SONIA rate was at 0.4875 percent while the 18-month rate was at 0.5150 percent, down from 0.50 percent and 0.5350 percent respectively on September 11 after official data showed the UK jobless rate had slipped to 7.7 percent.
Recent strong economic data, rising consumer confidence and an improvement in the labour market have led markets to price in a rise in interest rates much earlier than flagged by the BoE.
The BoE has said it does not plan to raise interest rates before UK unemployment falls to 7 percent, something it does not see happening until late 2016.
(Reporting by Anirban Nag; Editing by Ruth Pitchford)